Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.

Thursday, 31 January 2013

The UK’s Vickers commission
beavered away for a year or more with a view, amongst other things, to reducing
the TBTF subsidy that banks get. Ditto Basel III and Dodd –Frank in the U.S.
And the net result? They’ve managed to make matters worse, not better. See
here.

Words and phrases like “shambles”,
“cock-up” and “incompetence” spring to mind.

Tuesday, 29 January 2013

When cavemen had enough meat in
their stomachs and enough bear skin coats to keep warm, they probably sat
around doing nothing. The latter did not constitute unemployment because they
were not looking for work.

In contrast, when they were hungry
or needed a bear from which to make a bear skin coat, they went hunting. They
didn’t bother waiting for a “hunting job” to appear in situations vacant columns:
they just upped sticks, and went hunting.

As to the wage, that might have
been several kilos of meat and a bear skin per hour’s work if they were lucky.
Or it could be no meat and no bear skin at all, even after a day’s hunting. But
at least they weren’t unemployed.

So . . . $64k question . . . why
didn’t they experience unemployment? Well the reason was they were TOTALLY
FLEXILBLE when it came to the wage they’d accept: even accepting a zero wage.

Now we could do the same, or
similar. That is, if labour was allocated not by the market, but by the
bureaucracy (i.e. the state), and employers paid nothing for such labour, there’d
be almost no limit to the number of employees an employer would be prepared to
take on. Well, “no limit” is perhaps an exaggeration, but certainly if
something is free, you use it like water: i.e. the demand for labour would rise
by more than enough to virtually wipe out unemployment.

The latter labour market would be
highly inefficient, though it would have an important merit, of which more
below. The inefficiency would arise from the fact that for the bureaucracy to
judge who to allocate labour to, employers would have to apply for the types of
labour they wanted, explain why they needed it. The bureaucracy would then have
to decide which firms most merited particular types of labour and in what
quantities.

The system would have similarities
to Soviet style centrally planned economies: it would be inefficient. That is,
much the best way to allocate any resource, particularly a valuable resource,
is simply to let employers bid for it with the highest bidders getting the
resource. That results in best use being made of the resoure.

However, 21st century
unemployed labour is clearly not a “valuable resource” in the eyes of
employers. To be more exact, while it is easy to use the above mentioned “bidding”
process to get about 90% of the workforce employed, problems arise if the
bidding process (i.e. raising aggregate
demand) is used to get the final 5 or 10% employed: inflation tends to rear its
ugly head. That is, given such additional demand, employers rather than take on
the unemployed, tend to bid up the price of “already employed” labour (or give
in more easily to wage demands.)

In short, unemployed labour is
over-priced. Or put it another way, there wouldn’t be a problem if the
unemployed behaved like cavemen and were prepared to work for nothing.

Now clearly we can’t ask the
unemployed to work for nothing, but there is nothing to stop them being
allocated to employers for free, with the state paying the “wage” or if you
like, having the state make sure the unemployed don’t starve.

So . . . about 90% of the workforce is allocated using
demand, with most of the remainder being allocated via the bureaucracy. That
just leaves one problem: how do we stop employers taking on free labour which
is in fact reasonably productive? And that point is of particular relevance
since the potential output obtainable from any given individual varies
dramatically from month to month. Reason is that one month there might be no
vacancies in a given individual’s local labour market for which they are
particuarly suited, while a month later, a vacancy might appear for which they
are IDEALLY suited.

Well the solution to the latter
problem is not too difficult: just put a strict time limit on how long a
subsidised individual can stay with a given employer. At the end of the time
limit, and assuming the relevant employee is well suited to their vacancy, then
the employer will retain the employee and fund the employee’s wage. If not, the
employer will “let the employee go” as the saying goes. And the bureaucracy can
allocate the individual to another subsidised job.

Out of the mouths of babes and
sucklings . . and cavemen (to misquote Psalms 8:2)

____________

P.S. (3rd Feb 2013).
Coincidentally a post appeared on the Worthwhile Canadian Initiative blog three
days after the above one and on the subject of baboon economies. Plus the
author, FrancesWoolley says he might do
a post on elephant economies. I look forward. We have much to learn from
cavemen, baboons and elephants.

Monday, 28 January 2013

As mentioned
in the last post here, Mervyn King is not just a stuffy central banker: he comes
up with radical ideas in economics. Here’s one he produced some time ago (in
green). (H/t Mike Norman).

“There is no
reason products and services could not be swapped directly by consumers and
producers through a system of direct exchange – essentially a massive barter
economy. All it requires is some commonly used unit of account and adequate
computing power to make sure all transactions could be settled immediately.
People would pay each other electronically, without the payment being routed
through anything that we would currently recognize as a bank. Central banks in
their present form would no longer exist – nor would money.”

Interesting
idea, but I think it’s flawed. Certainly “computing power” could get rid of a
substantial proportion of transactions done with money. But there is a problem,
as follows.

What about
relatively large transactions (e.g. buying a house or car) where the purchaser
wants to save up in order to be able to make the purchase? If the purchase
makes shoes for a living for example, they could store up thousands of shoes
and then purchase the house or car with the stockpile of shoes. But that’s
hardly practical.

Money is a
far more convenient form of saving for the above sort of transaction. As to
whether the money is plonked in a bank, that’s a separate issue: the money
COULD BE hoarded under a matress.

To be more
exact, computing power could get rid of a well known problem with barter: the
so called “coincidence of wants” problem. That’s the fact that if you make
shoes for living and want ice cream, the ice cream seller will not necessarily
want shoes – or shoes of the type that you produce. But computing power does
not get rid of the above “saving” problem.

Sunday, 27 January 2013

I like Mervyn King because he
combines two almost mutually exclusive characteristics. One is being a central
banker, a job which requires conservative and measured language. The second is an
awareness of radical economic ideas: ideas which he shouldn’t really back in
public, but which he DOES BACK from time to time, if you read the small print.
(My favourite King quote is: “Of all the many ways of organising banking, the
worst is the one we have today.”)

So much for the complements. Now
for a criticism.

He said in his speech that there
were three factors behind Britain’s weak economic performance. As he put it,
“Three factors in particular have adversely affected the pace of recovery in
the UK. The first is an especially deep and protracted squeeze on the level of
many people’s real take-home pay. Over the past four years, money wages have on
average been rising at less than 2% a year. And higher energy and food prices,
as well as tax changes and a lower exchange rate, passing through to the level
of consumer prices, have all contributed to the squeeze. On average, real
take-home pay is no higher than back in 2004.”

I smell a tautology: “weak economic
performance” and “squeeze on take home pay” are one and the same thing – well almost.
To be exact, there are several reasons why it’s possible for a country to have
a “strong economic performance” while real wages remain stagnant, but none of
these reasons are applicable to the UK in recent years, and/or they don’t
justify the above claim by King.

Those reasons are as follows.

First, it’s possible to have a
larger than normal proportion of GDP is being diverted to investment, and real
resources consumed by investment are real resources not consumed by wage
earners. But that’s not happening, and King doesn’t say anything about strange
things happening with investment (in fact he alludes to the opposite: i.e. low
investment levels).

Second, it’s possible that a particularly large proportin of GDP is
diverted to exports. But that’s not happening either.

Third, it’s possible for the share
of GDP taken by profits to rise, and the share taken by wages to decline. But
that has not happened.

And even if it were to happen, it
would not explain weak economic performance if those in receipt of profits
spend the same proportion of their increased income as wage earners would have.
And even if “profit receivers” DID SPEND less of their increased income than wage earners would
have, that’s no earthly excuse for poor economic performance: i.e. in that
situation, there’d be nothing to stop monetary or fiscal policy giving the
economy some boost.

A fourth possible explanation for
depressed real wages is the deterioration in the exchange rate for Sterling
over the last five years or so. Now that certainly HAS HAPPENED, and King
refers to it. So the only REAL EXPLANATION for King’s “weak economic performance”
and depressed real wages is the exchange rate.

Non-peer reviewed (or only lightly peer reviewed) publications. The coloured clickable links below are EITHER the title of the work, OR a very short summary (where I think a short summary conveys more than the title).

i) The above is not a complete list in that earlier versions of some papers have been omitted. For a more complete list see here, and “browse by author” (top of left hand column).

ii) 7 deals with a wide range of alleged reasons for government borrowing, including Keynsian borrow and spend. 6 is an updated version of the "anti-Keynes" arguments in 7. 5 is an updated version of 1, which in turn is an updated version of 4.

______________

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Bits and bobs.

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As I’ve explained for some time on this blog, the recently popular idea that “banks don’t intermediate: they create money” is over-simple. Reason is that they do a bit of both. So it’s nice to see an article that seems to agree with me. (h/t Stephanie Schulte). Mind - I've only skimmed thru the intro to that article.________

Half of landlords in one part of London do not declare rental income to the tax authorities. I might as well join in the fun. I’ll return my tax return to the authorities with a brief letter saying, “Dear Sirs, Thank you for your invitation to take part in your income tax scheme. Unfortunately I am very busy and do not have time. Yours, etc.”________

Simon Wren-Lewis (Oxford economics prof) describes having George Osborne in charge of the economy as being “similar to someone who has never learnt to drive, taking a car onto the highway and causing mayhem”. I’ll drink to that.

Unfortunately SW-L keeps very quiet, as he always does, about the contribution his own profession made to this mess. In particular he doesn’t mention Kenneth Rogoff, Carmen Reinhart or Alberto Alesina – all of them influential economists who over the last ten years have advocated limiting stimulus (because of “the debt”) if not full blown austerity.________

Plenty of support in the comments at this MMT site for the basic ideas behind full reserve banking, though the phrase “full reserve” is not actually used.________

Old Guardian article by Will Hutton claiming the UK should have joined the Euro. Classic Guardian and absolutely hilarious.________

One of the first “daler” coins (hence the word “dollar”) weighed 14kg.!!! Imagine going shopping for the groceries with some of those in your pocket, or should I say “in your wheelbarrow”. (h/t J.P.Koning)________

Moronic Fed official reveals that GDP tends to rise when population rises. Next up: Fed reveals that grass is green and water is wet….:-)________

Fran Boait of Positive Money says the Bank of England "has no capacity to respond to a future crisis, and that puts us in an extremely dangerous position." Well certainly there are plenty of twits at the Treasury and at the BoE who THINK responding will be difficult. Actually there's an easy solution: fiscal stimulus, funded (as suggested by Keynes) by new money. Indeed, that’s what PM itself advocates. But it’s far from clear how many people in high places have heard of Keynes or, where they have heard of him, know what his solution for unemployment was.________

The US debt ceiling has been suspended or lifted 84 times since it was first established. You’d think that having made the Earth shattering discovery 84 times that the debt ceiling is nonsense, that debt ceiling enthusiasts would have learned their lesson, wouldn’t you? I mean if I got drunk 24 times and had 24 car crashes soon afterwards, I’d probably get the point that alcohol causes car crashes…:-) As for getting drunk 84 times and having 84 car crashes, that would indicate extreme stupidity on my part. No?________

The US Treasury has the power to print money (rather in the same way as the UK Treasury printed money in the form of so called “Bradburies” at the outbreak of the first World War).________

“Payment Protection Insurance” was a trick used by UK banks: it involved surreptitiously getting customers to take out insurance against the possibility of not being able to make credit card or mortgage payments. UK banks have been forced to repay customers billions. But that’s just one example of a more general trick used by banks sometimes called “tying”: forcing, tricking or persuading customers to buy one bank product when they buy another. More details here on the Fed’s half-baked attempts to control tying in the US.________

The farcical story of economists’ apparent inability to raise inflation continues. As I’ve long pointed out, Robert Mugabe knows how to do that. In fact Mugabe should be in charge of economics at Harvard: he’d be a big improvement on Kenneth Rogoff, Carmen Reinhart and other ignoramuses at Harvard.________

I’ve removed comment moderation from this blog. The only reason I ever implemented it was so as get rid of commercial organisations advertising something and posing as commenters. When doing that I noticed comments were limited to people with Google accounts for some strange reason. Removed that as well. ________

Article on money creation by Prof Charles Adams, who as far as I can see is a professor of physics at my local university – Durham. I can’t fault the first half of his article, but don’t agree with the second half which claims both publically and privately issued money are needed because we have a public and private sector. I left a comment.

Adams is nowhere near the first physicist to take an interest in money creation. Another is William Hummel. These “physicist / economists” are normally very clued up (as befits someone with enough brain to be a physicist).________

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MUSGRAVE'S LAW SOLVES THE FOLLOWING PROBLEM.

The problem. Deficits and / or national debts allegedly need reducing. The conventional wisdom is that they are reduced by raising taxes and / or cutting government spending, which in turn produces the money with which to repay the debt. But raised taxes or spending cuts destroy jobs: exactly what we don’t want. A quandary.

The solution. The national debt can be reduced at any speed and without austerity as follows. Buy the debt back, obtaining the necessary funds from two sources: A, printing money, and B, increasing tax and/or reduced government spending. A is inflationary and B is deflationary. A and B can be altered to give almost any outcome desired. For example for a faster rate of buy back, apply more of A and B. Or for more deflation while buying back, apply more of B relative to A